Negative interest rates only create losers
We are in a world that has to live with negative interest rates arriving at an alarming rate. The Bank of Japan was the first to lower interest rates below zero, after which the central banks of Sweden, Denmark and Switzerland followed the example of the Japanese. Next in line to adopt negative rates was the European Central Bank and it is generally assumed that other central banks will announce similar measures. But all these central banks have forgotten to ask themselves one important question: what are the (undesirable) consequences of negative interest rates? The answer to this question is, however, very important for the world economy as a whole.
The first consequence is obvious. The central banks want to punish the holding of cash – the money must actually be consumed so the economy can grow at a faster rate. Ironically, people tend to hold their savings in an environment of negative interest rates in the form of cash, rather than paying for placing their money in a bank account. The choice for cash instead of for a bank account can add to deflation at a time when this economic plague has already become a serious problem. Not for nothing does the ECB want to take 500 Euro notes out of circulation, in the hope of discouraging the holding of cash.
In addition, negative interest rates may change the consumption habits of Europeans. Many consumers and companies nowadays buy products on credit and wait as long as possible to pay the bills. That, however, has no meaning in a world of negative interest rates, for the simple reason that there is no longer any money to be earned by saving cash. It seems wiser to spend the money available as soon as possible. So everyone will want to pay his or hers bills as soon as possible, because in a world of negative interest rates, everybody will be punished for the possession of cash.
Another consequence of negative interest rates will be the creation of bubbles in the financial system. Everyone will be encouraged to take out debt because that is as good as free. The borrowed money will be invested in anything and everything, with bubbles in bonds, stocks, real estate etc. as a result. A final consequence will be currency wars which will end in a race to the bottom for each and every currency. Everyone wants the cheapest currency, resulting in complete chaos on the currency markets. It looks as if we will face a difficult period, the outcome of which is even more difficult to predict. And the auto sector will be affected too, because currency wars have no winners but only losers. | 29/03/2016 | Jos Sterk